Question

The government of a poor developing country fears that a political upheaval will occur unless

the growth rate is at least 6 percent per annum. The ICOR and the saving rate are projected to be

v = 5.0 and s = 15 percent, respectively.

a. Show that 6 percent growth cannot be achieved under these circumstances. (1 Mark)

b. With the saving rate as given, what ICOR would be required to achieve the 6 percent growth

target? (2 Marks)

c. What happens to the question (a) and (b) if population growth and depreciations in Harrod

Model is 𝒏 = 𝜹 = 𝟎. 𝟎𝟐?

Answer 1

Estimated growth rate = $5\%$

The ICOR, v = 5.0

The saving rate = $15\%$

a. Show that 4 percent growth cannot be achieved under these circumstances.

$Growth rate = \frac{Saving rate}{ICOR}$

$= \frac{15}{5} =3.0\%$

Therefore only 3.0 can be achieved under the given conditions and not $6\%$

b.With the saving rate as given, what ICOR would be required to achieve the 6 percent growth target?

$ICOR = \frac{Saving rate}{Growth rate}$

$=\frac{ 15}{6} = 2.5$

c.δ stands for the rate of depreciation of the capital stock. For δ = 0. 02, the growth rate will be less than $5\%$ and the ICOR value above would not be achieved.